The CEO Pay Debate: Why Reform is Going Nowhere

Your friendly local Fortune 500 company is dumping toxic chemicals into the river that runs through your town. You want the problem fixed. Who do you expect to do the fixing? The company’s shareholders? Of course not.

That same Fortune 500 company, you’ve just learned, is paying a woman who lives next door to you less than a man who does the same work? Who do you expect to end that discrimination? The company’s shareholders? That thought would never enter your mind.

No sensible American would expect shareholders, and shareholders alone, to fix problems like these. So why do we expect shareholders to fix executive pay? Just take a glance at the CEO pay reform proposals now pending before Congress, the bills getting “serious” consideration. Almost all these bills share a common theme. Empower shareholders. Give shareholders a “say on pay” decisions. Help shareholders nominate real independents to corporate boards of directors. Disclose to shareholders more corporate pay data.

All these reforms make sense. Top executives and their cronies on corporate boards shouldn’t be able to run publicly traded corporations as private preserves. And if shareholders had more power, they might even use it — to stop “poorly performing” CEOs from pocketing mega-million windfalls.

But the CEO pay problem we face today goes far beyond the windfalls that funnel to “poorly performing” execs who pocket mammoth rewards while their corporate share prices plummet. Our problem has become those mammoth rewards, in and of themselves. Outrageously high rewards, simply put, give executives an incentive to behave outrageously. They downsize, outsource and cook their corporate books. They take reckless risks. Left to their own devices, they eventually crash the global economy. In the process, they cost millions of Americans their jobs, their homes and their retirements. The kingpins of Wall Street who took all those reckless risks — before last September’s crash — actually “performed” quite well for shareholders. Year after year, they delivered rising share prices.

Shareholders have no reason to begrudge executives like these their fortunes. But the rest of us do. To grab those fortunes, after all, executives are making decisions that place our futures at risk. And that reality takes us right to the core of what’s wrong with the current executive pay reform debate’s single-minded focus on shareholders: Why should we let shareholders be the ultimate arbiters on the size of executive rewards when these rewards can and do create incentives for CEO behaviors that hurt people who aren’t shareholders? In effect, all of us have become stakeholders in executive pay decisions — and we need, consequently, a stakeholder, not just a shareholder, approach to reform.

What might that approach look like? A few bills now buried in Congress give some tantalizing hints. One bill, sponsored by Rep. Jan Schakowsky of Illinois, would extend tax breaks and federal contracting preferences to companies that meet benchmarks for good corporate behavior. Among the benchmarks: not paying any execs more than 100 times the wage that goes to their company’s lowest-paid worker.

This legislation’s basic message to Corporate America: If you overpay your CEO, you’re not going to get taxpayer dollars. A generation ago, top executives in the United States typically took home not much more than 30 times what their workers made. Last year, notes a new Institute for Policy Studies report we helped prepare, top American CEOs took home 319 times the typical U.S. worker annual wage.

Nothing that has happened within our economy, over recent decades, justifies this immense spread. High-ranking executives have neither become “smarter” than their workers over the last generation or more “productive.” They have, on the other hand, become more powerful.

Congress and the White House need to confront this power and move to start deflating, once and for all, the executive pay bubble. Until they do, reckless executive behavior will continue to threaten the economic security — and decency — that Americans hold dear.